Dechert Explains PWG Report on MMFs
An update written by Dechert LLP and published on website JDSupra, entitled, "President's Working Group on Financial Markets Issues Report on Money Market Fund Reform Options," explains, "The President's Working Group on Financial Markets (PWG) on December 22, 2020 released a report on potential reform options for money market funds (Report). The Report states that the significant outflows experienced by prime and tax-exempt money market funds (MMFs), as well as the stress experienced in the short-term funding markets beginning in March 2020, underscores the need for further improvements to the regulation of MMFs beyond the reforms enacted following the 2008 financial market crisis. The Report acknowledges that there have been several iterations of reforms since the 2008 crisis, designed to improve MMF resiliency to credit and liquidity stresses. However, the Report recommends that more should be done to address systemic risks and the structural vulnerabilities of MMFs to large-scale redemptions." (See Crane Data's Dec. 24 News, "PWG Paper Discusses Potential Reform Options for Money Market Funds," and our Dec. 30 News, "More on PWG's Grab Bag of Zany MMF Reform Options: WLAs, MBR, LEB?") Dechert writes, "To that end, the Report presents several possible reform options for prime and tax-exempt MMFs to facilitate discussion among regulators, including the Securities and Exchange Commission. Following the publication of the Report, the staff of the SEC's Division of Investment Management (Division) requested feedback on the Report's recommendations. While it is unclear whether the SEC and other regulators will adopt any of the Report's recommendations in light of the change in Administrations, the Report may serve as a blueprint for those regulators in considering future MMF reforms. Below are the 10 MMF reforms proposed by the Report, each of which is discussed in more detail in this OnPoint." The options include: "Removal of the tie between MMF liquidity and fee and gate thresholds; Reform of the conditions for imposing redemption gates; Imposition of a minimum balance-at-risk (MBR); MMF liquidity management changes; Countercyclical weekly liquid asset requirements; Floating net asset value (NAV) requirements for all prime and tax-exempt MMFs; Swing pricing requirement; Capital buffer requirements; Requirement for liquidity exchange bank (LEB) membership; and New requirements governing sponsor support." Dechert's "Onpoint" update adds, "Although the Report discusses various reform measures, the PWG does not recommend any particular reform. Rather, the Report discusses potential benefits and drawbacks of each option, with the overarching goals that any future reforms should: (i) 'effectively address the MMF structural vulnerabilities that contributed to stress in short-term funding markets'; (ii) 'improve the resilience and functioning of short-term funding markets'; and (iii) 'reduce the likelihood that official sector interventions and taxpayer support will be needed to halt future MMF runs or address stresses in short-term funding markets more generally.'"
